Managing Crystallised Tax Gains: Opportunities and Obstacles
As the saying goes, it is possible to have too much of a good thing. So it goes for capital gains accumulated, but not crystallised in your General Investment Accounts (GIAs). On the one hand, it’s generally good news when your bottom line is going up. At the same time, HMRC has a way of having his due. If your taxable account gains are left unchecked, so too is your risk for incurring burdensome capital gains taxes when the day comes for you to encash sizeable portions of your taxable portfolio.
Fortunately, there is one “power tool” we can employ to your advantage as part of your annual tax planning initiatives. Like a hedge clipper on an unruly shrub, we can sometimes help you enhance the health of your overall portfolio by prudently employing available annual tax breaks to trim overgrown capital gains out of your GIA.
The Logistics Each year, you and your spouse can crystallise a prescribed maximum of capital gains without incurring any capital gains tax. Currently, the annual allowance is a maximum of £11,100 per person. This figure is usually increased each year and you and your spouse can move assets between you to pursue the total tax break on £22,200 of gains per annum, per couple.
This means it can be in your best interest to crystallise GIA capital gains each year up to the maximum allowable amount. Here is a three-step summary of the round trip typically involved:
1. Sell all or part of a position in your portfolio when it is worth more than you paid for it to crystallise the gain (with no tax liability). 2. Hold the proceeds out of the market for 30 days, as required by HMRC. 3. Return the proceeds to their original position(s) no sooner than 31 days later.
Your Greater Goals As you might expect, there are complexities to bear in mind. When crystallising capital gains, it’s imperative that you remain true to your existing investment plan as one of the most important drivers in achieving your ultimate financial goals. That means remaining in the market with as many of your assets as possible at all times, as prescribed by your investment plan.
Simply selling down all capital gains proportionally across your various holdings (within the allowance threshold) is often inefficient. It may remove too great of a proportion of your overall portfolio into cash for the required 30 days. Plus, there are trading costs and other potential costs incurred. Thus we prefer to sell as few holdings in your portfolio as possible to crystallise capital gains as described.
Balanced Solutions To achieve an effective balance between seizing tax benefits and remaining true to your ongoing portfolio management, it’s usually most efficient to prioritise selling down the funds with the highest percentage of gains. This allows us to place the fewest trades from the fewest number of funds, resulting in lower costs and less money held out of the market for the obligatory 30 days.
We also can employ additional strategies to minimise the time your crystallised gains remain out of the market. For example, we can potentially buy similar (but not identical) assets to those sold and hold them during the 30-day period … if the multiple trading costs on the round trip involved won’t overshadow the benefits we expect to gain.
With married couples, there may also be an opportunity to sell funds held in one partner’s name and gift the proceeds to the other spouse, who can then immediately re-purchase the same assets. These new assets can be held for 30 days and then transferred back to the original partner. This also avoids the requirement of staying in cash for 30 days although, again, transaction costs must be factored into the equation.
Last but not least, we typically hold off on employing this tax-minimising strategy until near the end of the tax year, so we can best integrate it into the rest of your tax - and financial-planning tasks (such as funding your Pensions and ISAs or preparing for general liquidity needs).
Adding Value with Crystallised Tax Gains With any luck at all, capital gain growth in your taxable accounts is an inherent part of your investment journey toward accumulating new wealth. After gains occur, we can sometimes soften the eventual tax-burden sting by taking advantage of the annual tax break on crystallised gains, without harming your long-term investment strategy. Determining when and how to implement the strategy is one more way we seek to add value to your end returns and to your advisory relationship with us. Let us know if we can ever answer any questions about this or other tax-planning strategies you may have in mind.